1924 And All That
Just over one hundred years ago, Ramsay Macdonald (1866-1937) was appointed the first Labour prime minister by King George V. As the first Labour cabinet convened in late January 1924 there must have been a sense of unreality. Just 32 years after the election of the first Labour MP – Keir Hardie (1856-1915), after whom the current Labour leader was named – Labour had taken control of the British Empire and had overtaken the Liberals in the British two-party system.
This was a minority government. Labour had won 191 seats in the general election of 06 December 1923 as against the Tories’ 258 seats. But the Liberals, led again by the austere HH Asquith after the ousting of the flamboyant David Lloyd George, with 158 seats, swore to vote down any Tory administration, but indicated that they would support Labour. After much horse-trading, a trepidatious monarch invited MacDonald to kiss hands.
The first Labour cabinet, apart from MacDonald himself and a few others, was a pretty middle to upper class bunch – with five hereditary peers. MacDonald served as his own Foreign Secretary – the last PM to do this. The Dawes Plan was an attempt to reduce the burden of reparations on Germany – the issue which would later fuel the rise of Hitler. The Housing Act, 1924 laid the foundations of the British system of council housing. Over the next nine years about half a million council homes were made available to the lower-paid.
As it turned out, the first Labour government lasted barely nine months until, in October 1924, MacDonald was forced to request a dissolution of parliament. It was the MacDonald government that had recognised the Soviet Union; and it was mounting fear over Soviet infiltration (the Zinoviev Letter) that precipitated Labour’s defeat. In the general election of 29 October 1924, the Conservatives won a crushing victory, with 412 seats. Labour became HM Loyal Opposition with 151 seats. The Liberals won 40 seats: they would never again be a serious contender for power.
MacDonald returned to Number Ten Downing Street on 05 June 1929 after the general election of 30 May. This time, Labour won the most seats at last but fell well short of a majority in the House of Commons. Labour won 287 seats against the Tories’ 260. The Liberals scored 59.
But the world economy was about to collapse. Wall Street crashed in October 1929 and the Great Depression began to unfold. By late 1930 unemployment in the UK had surged to two and a half million. During 1931, the economic situation deteriorated further, and orthodox economists called for sharp cuts in government spending. Under pressure from its Liberal allies, as well as the Conservative opposition who feared that the budget was unbalanced, Chancellor Philip Snowden (1864-1937) appointed a committee headed by Sir George May to review finances. The May Report of July 1931 urged massive public-sector wage and spending cuts in view of a widening fiscal deficit.
This precipitated a political crisis. MacDonald’s instinct was to resign; but the King prevailed on him to form the National Government – a broad coalition with the Conservatives and the Liberals. This National Government, increasingly dominated by the Tories, persisted until Winston Churchill formed the Wartime Coalition in May 1940. But most Labour true-believers would have nothing to do with it. The Labour Party split between National Labour (supporters of the National Government under MacDonald) and the Labour Opposition. MacDonald was expelled from the party and labelled a “traitor”. MacDonald remained as prime minister until 1935, still reviled by much of his party. And when he died on an ocean liner heading to America in 1937 he went unmourned by his once-allies.
The scars of this trauma in Labour Party history persist until this day. Labour has never forgotten the 1930s. During the miner’s strike of 1983-84, the supporters of miners’ union leader Arthur Scargill dubbed the then Labour leader, Neil Kinnock, “Ramsay MacKinnock”.
Labour would not return to power until Clement Attlee (1883-1967) presided over its landslide victory in the July 1945 election. Labour’s post-WWII government, which relied on 393 seats against the Tories’ 197 seats, presided over the creation of the National Health Service and the welfare state; and it embarked on a massive house-building programme. The first nuclear power stations were commissioned – a technology in which for over a decade Britain was pre-eminent. Britain became one of the elite powers with “the bomb” (nuclear weapons).
The Attlee government, which lasted until October 1951, is rightly regarded as transformative. It privatised much of our national assets – including, less controversially, the Bank of England – and gave independence to India. The dismantlement of the British Empire began. Attlee won two consecutive general elections, though only narrowly in 1950: and that parliament lasted only until October 1951 when the Tories returned to power under Churchill.
Harold Wilson (1916-95) won two consecutive general elections, with a slender majority of four in the election of October 1964, and then a majority of 98 in the election of March 1966. He would return for a third term after the election of February 1974 – in which Ted Heath was swept from power – but with 33 seats short of a majority. This was increased to a majority of just three seats in the second election of 1974, held in October of that year. So, Wilson has the distinction of winning four general elections for Labour – but in only one of those did he win a majority in the House of Commons. Only Sir Tony Blair (PM 1997-2007) has led Labour to three consecutive majority election victories.
So, let’s take stock. Labour has had 19 leaders, but there have only ever been six Labour prime ministers over the last century. (The Tories have had five in the last fourteen years). Sir Keir Starmer will be only the seventh Labour prime minister. Labour has held power in the UK for just 33 out of the last one hundred years. And most Labour governments over the last century have been precarious minority governments which often confronted economic and financial crises. The only general elections in which Labour has won thumping majorities are those of 1945 (Attlee), 1966 (Wilson), 1997 (Blair), 2001 (Blair) and 2005 (Blair). Right now, it seems overwhelmingly likely that Sir Keir Starmer will join this litany, come 05 July.
But what can we learn from history about Labour’s economic and financial management?
Labour’s Economic Record
When Ramsay MacDonald came to power a century ago one pound could buy (incredibly) five United States dollars. As I write, the pound buys $1.28 – and is thereby described as “strong” by financial pundits.
Since 1931, every Labour government bar one (Tony Blair’s) has encountered a sterling crisis of one kind or another. In the 1931 crisis (under the newly formed National Government but with MacDonald still as prime minister), the pound was forced off the Gold Standard, to which Britain had re-attached itself when Churchill was Chancellor in the 1924-29 Tory government.
Attlee’s government in 1945 faced the immense challenge of paying for the war while also founding the welfare state. When the USA abruptly terminated the Lend-Lease arrangements within months of the end of the conflict, the pound came under pressure and the government was forced to devalue. In those days of the Bretton Woods system (which lasted from 1945 to 1971), currencies were pegged to the US dollar and governments determined the exchange rate by fiat. The pound had to be devalued again in 1949.
Harold Wilson’s government fought hard to avoid devaluation, but finally succumbed in November 1967 when the pound was devalued from $2.80 to $2.40. The putative cause was the “balance of payments crisis”, which persists but which we hardly discuss anymore. That was when Wilson made his famous speech about “The pound in your pocket”.
Only after the Nixon Shock of August 1971 were currencies of western states free “to float” such that exchange rates were determined by the FX markets. The issue of the exchange rate would beset all future Labour governments. But when Wilson returned in 1974 after the fall of the Heath government, devaluation was no longer an option. Yet a crisis came in 1976, just after Wilson had resigned making way for James Callaghan, when a combination of rampant inflation and horrendous public finances caused the pound to plunge. It was only after a humiliating International Monetary Fund (IMF) bailout package that the pound stopped falling.
The government of Tony Blair, however, faced a different problem. The pound remained strong throughout Blair’s premiership – the exchange rate having been the bane of John Major’s Tory government after sterling was ejected from the European Exchange Rate Mechanism (EERM) in September 1992 (Black Wednesday). It was only after the financial crisis of 2008-09, by which time Gordon Brown had become prime minister, that the exchange rate became an issue once again.
For now, the foreign exchange markets have shrugged off the prospect of an imminent Labour government. Indeed, the pound has been buoyant against the euro of late – largely because of the interest rate differential. And yet, the Labour leadership has said nothing about the management of the currency, even while Reeves & Co. have spoken about productivity and export competitiveness.
The UK is currently running a current account (trade) deficit with the rest of the world equivalent to about three percent of GDP. This means that we either have to borrow this amount of foreign currency every year or sell assets to cover the shortfall. Either way, the currency takes the strain. The solution to this challenge is either to boost exports and/or to substitute British-made goods for imports. (I have written extensively here about the need to grow and eat our own food, as regular readers will know).
The Labour top brass probably imagine that one approach will be to negotiate a more favourable trade deal with the European Union. It is pretty clear now that Brexit has, on balance, exacerbated our balance of payments deficit. We still import European foodstuffs; but it is horribly difficult for our farmers to export to Europe, and many have given up trying. But the noises coming out of Brussels are not encouraging to those on this side of the Channel who want to “get closer” to Europe. More on that soon.
Some Tory voices are suggesting that a second Trump presidency will offer the prospect of a “beautiful” (Trump’s word) trade deal. My own view is that it didn’t happen in Mr Trump’s first term because of a lack of will on the American side and will be even more unlikely in his second term. On the contrary, Trump 2.0 would be likely to slap swingeing tariffs on British imports.
If an incoming Labour government decides to increase the Bank of England’s inflation target from two to three percent – as has been mooted in some quarters – that could have serious consequences for the pound. The markets will conclude that UK inflation is likely to run at a higher level than in the EU or the USA indefinitely. It will become a self-fulfilling prophecy: dealers will start selling pounds, which, of course, will have inflationary consequences. A lower exchange rate is no consolation if it results in more expensive imports, especially if a country is running a significant trade deficit.
So long as a country maintains a substantial trade deficit – and especially if it simultaneously runs a persistent fiscal deficit – there will be downward pressure on its currency. That means that it will have to maintain interest rates at a higher level than otherwise, with a consequently negative impact on growth. On the plus side, Starmer-Reeves will be coming to power at a moment when the inflation and growth outlook is improving, just as Blair-Brown did in 1997.
Historically, the stock market fares no better or worse under Labour than under the Tories. Indeed, prospectively, the construction sector and housebuilders might be buoyed up by a Labour victory, as I discussed here last October.
None of these issues will feature in the leaders’ debates. But one hopes Rachel Reeves and her team are thinking hard about them. I strongly suspect they are.
Lessons Of History
Labour’s post-war government was notable for including a clutch of towering figures, many of whose names are still widely remembered today: Ernest Bevin, Aneurin Bevan (founder of the NHS), Herbert Morrison, Hugh Dalton, Stafford Cripps (Attlee’s vegan Chancellor), Hugh Gaitskell and the young Harold Wilson. Ellen Wilkinson, Attlee’s education minister who died tragically of pneumonia in 1947, was one of the first female cabinet ministers. How many members of Sir Keir Starmer’s cabinet-in-waiting can readers name?
A man or a party’s past does not necessarily determine his future – but it is a good guide to it. Sir Keir Starmer and Rachel Reeves will have little fiscal room for manoeuvre once in power. With the debt-to-GDP ratio already nearing 100 percent, they will be loath to spook the markets by increasing borrowing. There are severe domestic constraints and there is the ever-present danger of untoward external events – geopolitical risks are unlikely to decline over the next parliament. Everything points to Labour’s having to raise taxes, as Labour governments have done in the past.
The new Labour government will need to set out a clear direction quickly – something that is not evident during the election campaign thus far. Sir Keir will need to manage the political talent available (such as it is) well and ruthlessly – even though Labour’s army of an expected 400 or so MPs will include many tub-thumpers with few skills to offer.
Most of all, the new government will have to give the British people hope that their living standards will improve. That is quite achievable in the short term.
Afterword: The Summer Of 1924
Both of my parents were born in the summer of 1924 during that brief first Labour government. I shall mark my mother’s centennial next week. I’ll probably go to the churchyard where, on a clear day, one can stand by the grave and make out the cliffs of France across the green-grey waters of the English Channel.
I am pretty sure that all four of my grandparents voted Labour in that historic election of December 1923. (My two grandmothers would have been voting for the first time in their lives). Although I don’t recall having discussed politics with my paternal grandfather, Bert. Born in 1883, he was a Victorian working man to the last. Dying in the early 1970s under Ted Heath’s Tory government, he wore starched collars, a twill waistcoat and a cloth cap. He smoked Woodbines. His manner of speech would probably have been familiar to people living two hundred years ago.
My parents were Labour voters until the 1970s when they rejected the inflationary chaos (Sir Keir’s favourite word) of the Wilson-Callaghan years. They voted for Mrs Thatcher in 1979. My father was appalled when the Tory plotters defenestrated her in November 1990.
They never warmed to Mr Blair.